An Empirical Investigation of Ecns and the Dealer Market: Order Imbalances and Spread Patterns

41 Pages Posted: 12 Jun 2002

See all articles by Robin K. Chou

Robin K. Chou

National Chengchi University

Gang Shyy

National Central University - Department of Finance

Mei Chen

National Central University - Department of Finance

Abstract

After adopting Order Handling Rules in 1997, the Nasdaq Stock Market has become a hybrid market with both the quote-driven (market makers, the dealer market) and the order-driven (the Electronic Communication Networks, ECNs) trading systems. We study the Nasdaq stocks to empirically examine the spread patterns of ECNs and the dealer market under order imbalances. The results show that the spread size is much smaller in ECNs than that in the dealer market. The spread size decreases as the participation rate of ECNs increases. It is also found that the spread size does not fluctuate with the order imbalance conditions in ECNs. However, in the dealer market, the spread size is maximized when orders are balanced and minimized when orders are imbalanced.

Keywords: ECNs, Dealers, Order imbalance, Spread size

JEL Classification: G10, G14

Suggested Citation

Chou, Robin K. and Shyy, Gang and Chen, Mei, An Empirical Investigation of Ecns and the Dealer Market: Order Imbalances and Spread Patterns. Available at SSRN: https://ssrn.com/abstract=313961 or http://dx.doi.org/10.2139/ssrn.313961

Robin K. Chou (Contact Author)

National Chengchi University ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei, 11623
Taiwan
+886-2-29393091 ext. 81016 (Phone)

Gang Shyy

National Central University - Department of Finance ( email )

No. 300, Jhongda Rd, Jhogli City, Taoyuan, Taiwan,
Jhongli, TY 32001
Taiwan

Mei Chen

National Central University - Department of Finance ( email )

No. 300, Jhongda Rd, Jhogli City, Taoyuan, Taiwan,
Jhongli, TY 32001
Taiwan

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